In my Name That Trade post last month, I pointed out the large divergence between MON stock and commodity grains prices to start 2013. This is what I wrote then:
Monsanto’s bread and butter business is to sell genetically modified seeds to farmers to improve farmers’ yields, mostly when growing the big cash crops: corn, soybeans, and wheat. The company sells 60% of its products in the U.S., and 40% internationally (half of that in Latin America). Monsanto is in effect a technology company, but for the agricultural industry. As a result though, its fortunes are often tied to the whims of grains prices.
That’s what makes me nervous with the stock here. Check out the chart of corn (blue), soybeans (red), and wheat (green) prices vs. Monsanto stock (black) over the last year:
- 1 year chart of MON vs. corn, soybeans, and wheat futures, Courtesy of Bloomberg
The grains topped out last summer after the severe drought conditions subsided, and MON stock has continued higher. MON reported a stronger than expected quarter on Jan 8, 2013, which has been part of the reason for the outperformance, and the broader stock market gains have contributed as well. But at the end of the day, if grains prices are lower, farmers’ input spending is usually lower as well.
Since that post, the divergence has actually increased. Here is an updated chart demonstrating that divergence:
[caption id="attachment_24734" align="alignnone" width="634"]
1 year chart of MON (black) vs corn (blue), soybeans (red), and wheat (green), Courtesy of Bloomberg[/caption]
Given my expectations for broader market weakness, this increased divergence, and no further catalysts after MON’s earnings report on Apr. 3rd, I like the entry today on a short-biased trade on MON:
TRADE: Buy the MON ($104.50) May 105 / 97.5 / 90 Put Fly for $1.80
-Bought 1 May 105 Put for 2.99
-Sold 2 May 97.5 Puts at 0.68
-Bought 1 May 90 Put for 0.17
Break-Even on May Expiration:
Profits: Make up to 5.70 btwn 103.20 and 91.80, with max gain of 5.70 at 97.50.
Losses: Lose up to 1.80 btwn 103.20 and 105, and btwn 90 and 91.80 , with max loss of 1.80 at or above 105 and at or below 90.
Choice of Strikes: The chart shows the importance of the 50 day moving average, in pink, currently around 102.50:
The 50 day ma has not been convincingly breached in 2013. A break would bring into play support from earlier this year around 97.50, with longer term support at last year’s resistance level around 93. That’s why I like targeting profits in the 103 to 93 range with the butterfly that I’ve chosen.
Original Post March 22, 2013: Name That Trade – $MON The Miracle Grower
When I was a market maker in Monsanto in 2007 and 2008, it traded more like a high-flying tech stock during the tech bubble than a staid, agricultural products company. Here is the 10 year weekly chart that shows what I mean:
[caption id="attachment_23984" align="alignnone" width="627"]
10 weekly chart of MON, Courtesy of Bloomberg[/caption]
Options routinely traded with an implied volatility in the 40’s and 50’s, previously unheard for a boring name like MON (it’s currently back to its old, boring ways, around a 20 vol).
Fast forward to today, and after the commodities bubble burst in 2008, MON was fell from near 150 to below 50, in dramatic fashion. But the stock has been on a slow and steady climb ever since, growing more slowly but also more sustainably. With earnings growth of 10-15% projected over the next 3 years, life finally feels more secure for Monsanto shareholders.
So what’s my view on the name here, above the psychologically important 100 level?
Monsanto’s bread and butter business is to sell genetically modified seeds to farmers to improve farmers’ yields, mostly when growing the big cash crops: corn, soybeans, and wheat. The company sells 60% of its products in the U.S., and 40% internationally (half of that in Latin America). Monsanto is in effect a technology company, but for the agricultural industry. As a result though, its fortunes are often tied to the whims of grains prices.
That’s what makes me nervous with the stock here. Check out the chart of corn (blue), soybeans (red), and wheat (green) prices vs. Monsanto stock (black) over the last year:
[caption id="attachment_23989" align="alignnone" width="631"]
1 year chart of MON vs. corn, soybeans, and wheat futures, Courtesy of Bloomberg[/caption]
The grains topped out last summer after the severe drought conditions subsided, and MON stock has continued higher. MON reported a stronger than expected quarter on Jan 8, 2013, which has been part of the reason for the outperformance, and the broader stock market gains have contributed as well. But at the end of the day, if grains prices are lower, farmers’ input spending is usually lower as well.
I considered doing a trade to fade the recent strength, but decided against it as MON reports earnings on Apr 3rd, and I don’t want to risk a trade on whether the number will be strong or weak. But I have MON on my radar if that divergence continues going forward.